Will Apple’s content business stymie share price performance?

Reports that Apple is to stop taking commissions from rival streaming video services through its devices could cause issues for the tech giant’s share price.

Apple’s [APPL] share price has taken a hit so far during the coronavirus pandemic — the stock has dropped 9.2% from the start of the year to 14 April. It has fallen behind FAANG counterparts Amazon [AMZN] and Netflix [NFLX], which in the same time have seen their share prices gain by 20% and 14.3%. It has, however, performed better than Facebook [FB] and Google parent company Alphabet’s [GOOG] share price, which have lost 16.7% and 13.1% respectively.

Apple smartphone sales are expected to be affected as a result of the virus. At the end of March, the company closed a swathe of stores worldwide in response to the virus threat, again at the detriment to Apple’s share price performance.

Although in July reports showed that for the first time since 2012 iPhone sales constituted less than half of Apple’s total revenue the iPhone, as well as being synonymous with the company, is still a major contributor to the business as a whole. As such the potential delay to the launch of the iPhone 12 — the first with 5G capabilities — would make Apple’s services businesses more important than ever to both company growth, and any short- to medium-term share price gains.

However, with some service lines performing better than others, the downward pressure on Apple’s share price could continue.

Apple TV+ falters

Apple’s TV streaming business launched in November 2019 with only a handful of new titles and no back-catalogue. Since then, the service is estimated to have had fewer than 10 million sign-ups, according to Bloomberg and based on research from Bernstein. Meanwhile, Disney+ has now amassed 50 million subscribers — following its US launch in November last year and in Europe last month — while Netflix boasts 167 million.

Apple’s already minimalist offering has been further dented by the knock-on effects of the pandemic. Production has stopped on a number of its upcoming titles, according to reports, meaning that release delays are likely.

<10million

Number of Apple TV subscribers, versus Disney+ having over 50 million

Then at the start of April, Apple said in a statement that individuals could pay for some premium content through their existing subscriptions to services such as Prime Video, Altice One and Canal+. This would effectively waiver the 15–30% commission that Apple takes on sales through third-party apps on the applicable content.

While companies such as Netflix and Spotify have already exempted themselves from this fee by offering alternative payment methods for consumers Amazon and Canal+ were, up until this point, still subject to it. Last year, Spotify filed an antitrust complaint to the European Union — which alongside the US Justice Department has antitrust probes pending regarding Apple — complaining that Apple engaged in anticompetitive behaviour by imposing such rules, Reuters reports

It is not immediately clear why Apple chose to change its policy, nor whether it will apply to Netflix and Spotify, the publication notes.

A service issue?

According to Crispus Nyaga, Apple has a services problem. The segment — which includes Apple Arcade, Apple Pay, Apple Card, App Store, Apple TV + and Apple Music — grew by 17% last year to reach nearly $50bn. But while some of these services may see a bounce, such as Apple Arcade and Apple News, others may suffer, Nyaga wrote in Seeking Alpha.

“I expect Apple's service revenue, which was the only segment growing in the past few years, to start slowing. This will significantly affect Apple's stock, which tends to be valued as a growth company,” he considered.

“I expect Apple's service revenue, which was the only segment growing in the past few years, to start slowing. This will significantly affect Apple's stock, which tends to be valued as a growth company” - Crispus Nyaga

Elsewhere, JPMorgan analyst Samik Chatterjee lowered his share price target on Apple from $350 to $335. He has taken a “much harsher look” at sales for the June and September quarters due to “limited” customer engagement during the coronavirus pandemic, according to MarketWatch.

"We are now drastically cutting our C2Q sales estimate, which assumes stores reopen outside of China in mid-May at the earliest as well as a steady ramp in activity to normal sales levels by the end of C3Q," Chatterjee wrote in a note.

However, many still back the tech giant. A biannual survey of teenagers by Piper Sandler found that the iPhone remains the most popular smartphone among competitors, TheStreet reports. The firm raised its share price target to $300 from $260.

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